This is another post from the Suggest a Topic page, and this time we’re going to take a look at what a Dynamic PE ratio fund is, and look at one such fund – the FT India Dynamic PE Ratio Fund in detail.
As the name suggests – a dynamic PE fund allocates its money between debt and equity based on the P/E levels of an underlying index.
The idea is that you use the P/E level of the market to indicate if the market is over – priced or not, and then adjust your investment accordingly. I have written about this topic in an earlier post about P/E levels and market indicators, so you can read that if you’re interested in seeing some numbers and charts explaining the idea more.
At a high P/E level you buy more debt and less equity, and at a low P/E level you buy more equity and less debt.
In the case of FT India Dynamic – the underlying index is the NSE Nifty, and the investment allocation will be according to the following rule:
|NSE Nifty P/E Band||Equity||Debt|
|Upto 12||90 – 100||0 â€“ 10|
|12 – 16||70 – 90||10 â€“ 30|
|16 – 20||50 – 70||30 â€“ 50|
|20 – 24||30 – 50||50 â€“ 70|
|24 – 28||10 -30||70 â€“ 90|
|Above 28||0 – 10||90 – 100|
The fund will move your investment from equity to debt based on where the P/E ratio is at that time.
To get equity exposure it will invest in the Franklin India Bluechip Fund, and to get debt exposure it will invest in the Templeton India Income Fund.
So, it is a fund of fund that invests in underlying funds from its own family based on where the P/E stands at that point in time. The expense ratio of this fund is 0.75%, so that’s money you pay in addition to the expenses of the underlying fund.
Let’s look at performance now.
|Time Frame||FT Dynamic P/E Fund||BSE Sensex|
|Last 5 years||13.75%||11.50%|
|Last 3 years||12.01%||7.52%|
|Last 1 year||8.74%||10.94%|
So, you can see that the fund has done fairly, and beaten the index when looked at a longer perspective.
Due to the portion of debt in the fund: while it protects you from downswings – it also limits your gains when the markets do very well.
From the prospectus I see that fund fund rose ~ 53% in 2006 when the Sensex rose ~74%, and it rose ~56% in 2010 when the Sensex rose by ~ 80%.
The fund still beat its benchmark but if you look at my best balanced funds post you will notice that there are quite a few funds that have bettered this performance over the 3 year and 5 year range.
So, when thinking about investing in a PE fund – whether this or another – just take a look at how other balanced funds are performing as well because they are similar in structure.
One last point about the tax structure is that the Dynamic PE fund is not treated as an equity fund (which has tax advantages over other funds), because it can have a lot of debt in its structure as well.
As always, whether to invest or not is a decision that you have to take, and I hope this information can give you some input on that decision.